Vanguard Funds

Fund Complex: Vanguard
Management Company: (1) Vanguard Group, Inc., (2) Wellington Management Company LLP
Funds Affected: (1) Vanguard Social Index Fund, (2) Vanguard Global ESG Select Stock Fund
Sustainable Investing Strategies: (1) Exclusions, ESG Integration, (2) ESG Integration
(1) The fund seeks to replicate the performance of the FTSE 4Good Index, which is derived from a selection of constituents that comprise the FTSE ESG ratings universe. As of September 2014, FTSE implemented a new ESG assessment methodology.  The new model contains over 300 Indicators, 14 Themes and 3 Pillars, including governance, social and environmental considerations. Environmental themes include climate change, water use, biodiversity and pollution and resources as well as supply chain considerations.  Social themes include customer responsibility, human rights and community, labor standards, health and safety and supply chain considerations; and the governance theme includes corporate governance, risk management, tax transparency and anti-corruption.

Based on publicly available data, each company in the research universe is given a FTSE ESG Rating ranging from 0 to 5, with 5 being the highest rating. From June 2015 companies with a FTSE ESG Rating of 3.3 and above have been added to the index, subject to any additional requirements that comprise the overall methodology.  FTSE intends to revise down the inclusion threshold to 3.0 over time.  Constituents of the FTSE4Good Index with an ESG Rating below 2.5 are at risk of deletion from the FTSE4Good Index.

Companies which manufacture the following products are excluded from the FTSE4Good Index Series: Tobacco, weapons systems, components for controversial weapons; cluster munitions, anti-personnel mines, depleted uranium, chemical/biological weapons and nuclear weapons as well as coal companies. FTSE includes other screens around controversies, water, nuclear power and manufacturing of infant formula, to ensure that these meet certain health and safety as well as customer responsibility criteria.

(2) The fund’s investment approach is based on proprietary, bottom-up fundamental research conducted by the advisor. The advisor considers the investment universe, sector-by-sector and region-by-region, looking for companies with strong long-term fundamentals that also meet the advisor’s ESG criteria. The advisor will place an emphasis on the following company attributes: (1) a proven track record of effective capital allocation; (2) leading ESG practices as determined by the advisor through an evaluation of how the company integrates material ESG risks and opportunities into its corporate strategy (e.g., a realistic assessment of long-term ESG risks and opportunities, increased transparency into the company’s ESG practices, management teams with aligned incentives, better governance practices, and thoughtful resource allocation); and (3) confidence that a wide gap between return on capital and cost of capital can be sustained. The advisor will then examine issues outside the scope of traditional research—such as corporate culture, adaptability, and employee engagement—to build conviction in each holding.